Good Management and Coprporate Governance. Hopeful Sector. Upcoming Industry. Analysis Says – The Company Fundamentals are Strong. Excellent future prospects. Technicals are suggesting to buy. Yes. Definitely the stock falls in the ‘Value Stocks’ category.
The secret of many people to become millionaires! The success mantra of many Mutual Funds to out-perform! Value investing is nothing but chasing those hidden gems to own. Just invest and forget to hug your future fortune. That’s what ‘The Value Investing Is!
What Are ‘The Value Stocks’
All those stocks that tend to trade much below their intrinsic value can be considered as ‘Value Stocks‘. These stock’s current market price don’t match with either the fundamentals of the company or its earning levels. And, thus considered to be an undervalued stock by the ‘Value Investors’.
How To Spot A Value Stock
If the company is paying good dividend, earning levels are excellent and sales growth rate is OK, but the stock is available at low price. We can exactly say that the stock is a value stock.
Other characteristics would be, high dividend yield, low P/E (low price to earnings ratio) and low P/B (low price to book value)
Why To Invest In Value Stocks
As the value stocks /securities are trading at a lower price than how the company’s performance may otherwise indicate, there will be a breaking down point in the near or the far future of every value stock. Difficult to guess, but sure to be assessed. The target price will be at least its intrinsic value.
Investing in a value stock is an attempt to capitalize on market inefficiencies. By investing in a value stock, we can make sure that, we are going to encash the inefficiency of the market to recognize the stock’s underlaying value.
How To Invest In Value Stocks
Just spotting a stock with the required ratios is not enough to decide upon that the stock is undervalued and can invest without any further investigation. Of course, this would be the first step to develop a rough list of stocks – that may be our best choice of value picks. So, just the screen test and making a list of stocks that we expect to be undervalued is over.
Apart from this there are two more steps of analysis required to be done before investing. They are ‘Qualitative Analysis’ and ‘Quantitative Analysis’.
What Is Qualitative Analysis
The entire analysis of the company, side stepping the financial ratio analysis (quantitative analysis) is called the qualitative analysis. Here there are no financial ratios not their analysis. But, it involves analyzing the company in the vague light of distinctive practical matters, which directly or indirectly affect the company’s performance and its stock value anyhow.
Factors like industry to which the company directly /indirectly related to, future scope of that industry, company management, corporate governance, company competitiveness with its competitors, government subsidies, quality of the goods produced, climatic conditions and finally the demand for its products /services etc, need to be analyzed in depth before deciding upon the stock to be a Value Stock. Unlike quantitative analysis, qualitative analysis needs more attention and is very time consuming.
Qualitative Analysis is best made by the investors, that is relevant to them. The companies they worked for, goods they sold once or well known with the products and their demand are best to be chosen for analysis.
It’s wise to buy companies, that you understand better
– Warren Buffet
What Is Quantitative Analysis
There is a myth among the common investors that ‘The Quantitative Analysis, is a little bit difficult ratio analysis performed by the expert analysts. But, the existed IT tools made it a crazy one minute analysis done by any common people. No financial expertise is required.
Once the ratio analysis is over, the next step is to analyze the impact of their values. All the investors with basic knowledge of how these financial ratios should be for the company’s out-performance in the near future, are said to be in good position in value stock picking.
Other Strategies To Invest In Value Stocks
Few value investors opt to invest in stocks of companies whose products or services have been in demand for a long time and are likely to be continued.
‘Innovation‘ – This sounds like a synonym of development. And of course the stepping stone of true development. But, this would be a great threat to certain companies and sometimes the whole industry too. History witnessed a few long-standing companies and industries victimized by new innovations. Their products /services became obsolete and the companies lost forever. Here, what we need is critical thinking skills. If there is a proof that, the company has been in the business for a longstanding period and has the ability to fast adapt the new changes and innovations, then we can be free to choose such businesses for further analysis. At this point it may be worthwhile to analyze management and the effectiveness of corporate governance to determine how the company reacts to new innovations and changing environments. Investment in such a business is considered to be always safe and fruitful.
That’s all. Thank for reading this topic.
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